Financial Reporting and Ethics - The Institute of Chartered ...

AMALGAMATION, ABSORPTION AND RECONSTRUCTIONCurrent liabilitiesTrade Creditors 381,235Interest on debenture 64,000445,235Net current asset 173,968Total assets less Current Liabilities 2,073,9688% Debenture (400,000)Net Assets: 1,673,968Capital and reserves:Ordinary shares of 25k 437,500Share premium 62,5008% of cum preference 175,000Capital reserve (WI) 998,9681,673,968Workings(W1)Capital Reduction AccountNGoodwill (written off) 200,000 Ordinary shares 375,000Profit and loss account 199,105 Investment 165,000Debtors 50,692 Land 870,000Equipment 3,770 Buildings 263,770Stock 251,235 Directors loan 30,000Capital reserve 998,968 _________1,703,770 1,703,7703.9.4.5 Principles of Formulating a Capital ReconstructionSchemeCapital reduction is worth considering if the company hasrecovery prospects. The following principles should be borne inmind:(a)`Hit’ ordinary shareholders hard. They should be madeto suffer more loss to be written off through the schemethan any other group. This is because they are the primebeneficiaries of the company’s future prosperity to beachieved through the scheme.(b)In a capital reduction scheme, preference shareholdersshould have a share, if the loss to be written off exceedswhat can be borne by the ordinary shareholders.However, the overriding principle should be what theposition would look like in the immediate liquidation. Ifin an immediate liquidation. Preference shares cannotbe paid in full, meaning that they will suffer some loss of57